Why Do People Buy NFTs?
The NFT market surpassed $40 billion in 2021.
That's more than the market cap of many large companies like General Mills, Dow Chemical, or Dell!
Why do people buy NFTs, though? What’s driving so many people to buy into this new technology?
Ultimately, everybody has their own reason for buying a non-fungible token.
Of course, NFTs are notorious as a form of speculative investment. This fact can make the entire concept of NFTs seem at risk of becoming the next dot-com bubble. Thankfully, there are more practical reasons that someone would buy NFTs as well.
In this article, you’ll learn some of the more pragmatic reasons why people buy NFTs.
By the end, you’ll have gained a better understanding of the real-world value that NFTs provide to buyers. Plus, we’ll cover some risks of buying NFTs that you should be aware of before buying one for yourself.
Are NFTs just digital art?
NFTs have gained most of their popularity via people paying millions of dollars for what amounts to JPG images.
When people first learn about NFTs, their initial introduction is almost certainly some goofy-looking cartoon portrait or avatar.
But that’s definitely not all that NFTs are good for.
Even though art NFTs are the ones that receive the most attention, they only make up about 10% of the NFT market. In reality, there are far more NFTs devoted to other uses.
So what are some of these more practical applications of NFTs?
Ensuring product authenticity
NFTs can be used to prevent counterfeiting.
Several high-end brands like Louis Vuitton are already starting to use NFTs to fight counterfeiting.
These physical items have corresponding NFTs on the blockchain.
The NFT acts like a digital certificate of authenticity. The NFT allows you to be sure that the product you own is authentic, even if you're buying them pre-owned from an individual instead of brand new.
NFTs can act as digital deeds for homes, commercial real estate, or any other form of real property.
Instead of needing to hire a professional to authenticate a deed or search through public records, all of the data gets recorded on the blockchain for anyone to see.
There are even companies looking to start offering mortgages using NFTs.
NFTs can be used in conjunction with other blockchain-based technology, such as using smart contracts to replace escrows. That makes it possible to entirely remove traditional intermediaries like lawyers or real estate agents (and their associated fees!) from your real estate transactions.
Supply chain tracking
Imagine picking up a bag of lettuce at the grocery store with an NFT attached to it.
This NFT could allow you to track the item’s entire journey along the supply chain. You could trace it back all the way from where it was grown and picked through to ending up on the store shelf.
It’s even possible to keep track of what temperature the product was stored at during transit. That way, you can immediately tell if products like raw meat have been exposed to unsafe storage conditions.
Plus, even after you take it home, this NFT could notify you about any product recalls as soon as they happen.
This might all seem a bit extreme for a simple package of lettuce. But with some blockchains allowing users to create NFTs for just a few cents each, we wouldn’t be surprised to see this technology used in all types of applications in the next few years.
The gaming industry is already one of the largest areas with practical applications for NFTs.
Among gamers, NFTs are a bit controversial. Some people shun them for fear that companies will start using them for money-grabbing microtransactions. However, NFTs do offer some interesting benefits for gamers.
For one thing, NFTs enable the possibility for cross-platform use. Imagine being able to dress your character in your favorite outfit regardless of what game you're playing.
NFTs in the gaming space also allow for easier trading between players. It cuts out the middleman (usually the game publisher) and any fees that would normally be associated with trading items on their own platform.
NFTs can remove the need for bus passes, parking passes, or any other kind of paper ticket.
In a few years, scanning an NFT on your phone might be standard practice to board your flight or get access to sports events.
For event organizers or service providers, the NFT also helps prevent fake or counterfeit tickets from being used.
NFTs can allow people to vote and give input on the things that they care about the most.
For example, MetaBrewSociety allows NFT holders to vote on how their favorite brewery is run. In addition to an annual beer allowance, their NFT gives them co-ownership rights that allow them to vote on key business decisions.
Musicians can use NFTs to sell their music directly to loyal fans.
Traditional record labels can take as much as 80% of the earnings from an artist’s music!
Being able to release their music independently means a significant amount more of the profits end up in the artist’s pocket.
NFTs have another benefit for artists as well. With regular CDs or MP3s, an artist can only sell them once. But NFTs can be set up so that the artist will continue to receive a percentage from all future resales as well.
Why do people buy NFTs?
Asking why people buy NFTs is a bit like asking why people buy computers. There’s a huge range of different use cases, and everyone will have a different reason for wanting to own an NFT.
However, here are some key benefits that people buy NFTs to take advantage of:
Access to exclusive perks
NFTs confer digital ownership to their holders. You can use some NFTs to access exclusive online forums or discounts, get early access to new product features, and more.
To preserve value or turn a profit
Although looking to make money is a common reason why people buy NFTs, it’s probably not advisable.
Keep in mind that the NFT market has recently dropped as much as 92%.
It’s entirely possible for an individual NFT project to become worthless, especially if it’s built around a fad or trend instead of real value.
To secure ownership and digital rights
Since NFTs are digital assets stored on a blockchain, they’re very secure and provide great proof of ownership. They’re practically impossible to steal or forge. Piracy is much more difficult with NFTs, which is great for the seller and the customer.
Whether you’ve got an NFT that represents a digital item in a video game or a lifetime subscription to a piece of software, one thing is for sure. If you have the NFT in your possession, you fully own it, and nobody can take it away from you.
For example, Stack Browser uses an NFT to act like a software license. It verifies ownership and grants access to the NFT holder.
NFTs are even an ideal way to safeguard ownership of physical assets like real estate.
To financially support artists they like
We alluded to this in the previous section, but musicians, authors, and all forms of artists can release their work as NFTs. This cuts out middlemen like record companies or publishers.
The digital artist gets a larger percentage of the proceeds from each sale. After paying a fee to a marketplace to facilitate the sale, the artist usually gets to keep about 97.5% of the proceeds. Comparatively, artists typically receive less than 20% of the profits through traditional publishing methods.
NFTs can benefit creators and artists of all sizes. From brand new artists releasing their first album, all the way up to Mike Shinoda of Linkin Park.
What do you get when you buy an NFT?
Just like the variety of reasons why people buy NFTs, exactly what you get after buying one isn’t a simple answer. It really depends on a case-by-case basis.
At the most ethereal level, an NFT might not provide you with anything except a picture to show off to friends or a feeling.
In more tangible cases, owning an NFT may give you specific rights and privileges. This can range from access to a private Discord server to making decisions for a company.
However, there's one main thing that anyone who buys an NFT will receive:
A unique token on the blockchain
NFT stands for nonfungible token. And at the heart of all NFTs, that’s what you’ll always receive when you buy one. A unique digital identifier that can’t be substituted for another, split off into a smaller piece, or copied.
An NFT is like a certificate of authenticity. It proves that the item it represents is uniquely yours.
When you buy an NFT, you aren’t buying the actual content in most cases. Instead, you're buying a token that connects your wallet address (basically your identity in the cryptocurrency world) with the actual product (e.g., artwork) on the blockchain.
Note that when you buy an NFT, you’re not usually getting the trademark or copyright to an item either. And just because you own an NFT, that doesn’t mean there aren’t endless other versions of that thing on the internet. (We’re looking at you, people paying millions of dollars for a screenshot of a Tweet.)
What are the risks associated with buying NFTs?
Some NFTs are inherently more risky or safe to buy than others. None are entirely free of risk, though.
Here are some risks worth considering before you drop your hard-earned cash on an NFT.
NFTs could be a fad or a tech bubble
If you’re getting into NFTs today, you’re still a very early adopter.
It’s possible that you could spend a lot of money on an individual NFT only to have it suddenly become worthless. Or NFTs as a whole may go out of style and suddenly be replaced with a new technology we haven’t thought of yet.
NFTs have a lot of great things going for them. They’re deflationary, just like Bitcoin. They can’t be duplicated, and they’re easily authenticated. But there’s still no guarantee that they’ll maintain their value over time.
Fakes or copycats exist
Although it’s almost impossible to counterfeit an NFT exactly, there are certainly fakes and copycats out there.
For example, some people will take an existing successful NFT project and simply re-upload it as a new collection of their own.
Usually, marketplaces will take down these types of scammers in a matter of hours. But if you’re unlucky enough to come across one and don’t double-check everything before your purchase, you might end up with a knockoff.
It's always good to verify details like contract addresses, which are much harder to forge, especially for large purchases.
Some people have criticized NFTs because of the computing power required to operate the blockchains they run on.
For example, most NFTs currently run on Ethereum. The Ethereum network uses 48.14 kilowatt-hours of energy per transaction (almost twice the daily energy consumption of an average household.) And there are nearly a million Ethereum transactions per day.
The environmental impact of NFTs should lessen over time, especially as more blockchain technology moves from a proof-of-work model to a proof-of-stake one. But it’s still worth considering.
Potential loss and security risks
If you aren’t very knowledgeable about the process, you could make a mistake somewhere along the process of buying crypto, transferring to a wallet, and buying your NFT. And you could lose your crypto or NFT in the process.
There are also security concerns to think about. If you don’t store your wallet seed phrase and password securely, a virus or hackers could compromise your device and steal your crypto and NFTs. If you lose access to your device and seed phrase, you lose your NFTs.
In the crypto world, a rug pull usually refers to a scammer who sells a new coin or NFT before quickly disappearing with all the profits.
NFTs and the cryptocurrency space are still a bit like the Wild West, especially regarding government regulation and legal enforcement, as many existing laws haven’t caught up with this new technological frontier.
Even well-meaning companies may offer all kinds of products and features but end up going bankrupt or disappearing and never making good on their promises.
Make sure you’re buying NFTs from reputable companies with a good track record.
Buy NFTs that have value to you
People buy NFTs for all sorts of reasons. You’ll have to decide for yourself if a particular NFT has value for your situation or not.
Sometimes, NFTs are speculative investments that people are hoping to use to make a quick buck.
Other times, it might just be to show off their flashy new NFTs to their friends for clout.
NFTs also serve more practical purposes. They can be used by companies for supply chain tracking or to prevent counterfeits. Individuals can use them for gaming or cut out middlemen on real estate transactions. NFTs can even be used to facilitate decentralized voting.
Stack has used NFTs to offer lifetime packages for our product — and it literally saved our company! We’re very excited to see what the future use cases of NFTs may be.